The recently enacted COVID-19 Related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020, both of which are part of the “Consolidated Appropriations Act, 2021,” includes the following provisions that expand and extend changes intended to provide relief to retirement plan sponsors and participants affected by the COVID-19 pandemic and other disasters.
Temporary Rule Preventing Partial Plan Termination
A retirement plan will not be treated as having a “partial termination” during any plan year that includes the period beginning on March 13, 2020, and ending on March 31, 2021 (i.e., 2020 and 2021 for calendar year plans), if the number of active participants on March 31, 2021, is at least 80% of the number of active participants on March 13, 2020. Partial terminations generally occur when there has been a significant change to the plan or a significant corporate event that affects the rights of employees to vest in their plan benefits.
This bright line safe harbor should reduce partial terminations that would otherwise occur during 2020 or 2021 due to employee turnover, including as a result of the COVID-19 pandemic. If a partial termination occurs during a certain period (typically the plan year), participants who experienced a severance from employment during the period must be fully vested, which reduces the forfeitures that could otherwise be used to offset employer contributions or pay plan expenses. Thus, the rule effectively provides an incentive for employers to ensure their retirement plan’s active participant count meets the 80% threshold on March 31, 2021.
Practice Pointer: Plan sponsors may be able to meet the March 31, 2021, threshold by increasing plan participation in ways beyond just hiring or rehiring employees, such as through expanding eligibility to part-time employees or other excluded classes.
COVID-19-Related Distributions (CRDs) from Money Purchase Pension Plans
The CARES Act provision that permitted in-service distributions from defined contribution plans to be specially treated as CRDs has been amended to include in-service distributions from money purchase pension plans. This change applies retroactively as if originally included in the CARES Act, which means it applies to distributions made from January 1, 2020, to December 30, 2020, from a money purchase pension plan. CRDs are entitled to certain favorable tax treatment. For more information on CRDs, see our prior article discussing benefits provisions in the CARES Act. If a money purchase plan will permit CRDs, which are not required, a retroactive amendment for this purpose generally must be made by the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans), for non-governmental plans and by the last day of the first plan year beginning on or after January 1, 2024 for governmental plans.
Relief for Disasters Other than the COVID-19 Pandemic
Familiar provisions permitting favored distributions and increased loan limits, which are similar to the CRDs and increased loan limits provided in response to the COVID-19 pandemic, have been adopted for participants affected by qualified disasters other than as a result of the COVD-19 pandemic. These same provisions have been enacted at various times in response to certain disasters, such as wildfires and hurricanes, and provide the following relief:
- A participant who lives in a qualified disaster area and has sustained economic loss may treat up to $100,000 in plan distributions as qualified disaster distributions (QDDs). The 10% early withdrawal penalty does not apply to QDDs, and the participant may recognize gross income from the QDD ratably over a three-year period.
- A participant who received a hardship distribution to be used to purchase or construct a principal residence in a qualified disaster area, but which was used for other purposes as a result of the disaster may recontribute some or all of the distribution. To qualify, the hardship distribution must have been received 180 days before and up to 30 days after the qualified disaster. The repayment must be made within 180 days of the enactment of the act.
- A plan may increase loan limits to up to $100,000 for a participant who lives in a qualified disaster area and has sustained economic loss. Additionally, the due dates for payments on an outstanding loan to such a participant payable beginning as of the date of the disaster and ending 180 days after the end of the disaster must be delayed for the later of 1 year or the date that is 180 days after the end of the disaster. Subsequent repayments must be re-amortized to reflect the delay and accrued interest, and the period of delay is disregarded in applying the five-year repayment deadline applicable to plan loans.
If a plan provides for disaster relief, which is optional, a retroactive amendment for this purpose generally must be adopted by the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans), for non-governmental plans and by the last day of the first plan year beginning on or after January 1, 2024 for governmental plans.
In addition to the above, the acts reduce the minimum age for in-service distributions from certain multiple employer plans and provide relief from certain restrictions for over-funded pension plans that have transferred funds to accounts providing retiree health and life insurance benefits.
If you have any questions about the changes to retirement plans in the acts, please contact one of the attorneys in the Employee Benefits and Executive Compensation Practice Group at Bradley.